UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 0-18728
INDEVUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3047911
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Ledgemont Center, 99 Hayden Avenue 02421-7966
Lexington, Massachusetts (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (781) 861-8444
Former name: Interneuron Pharmaceuticals, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class: Outstanding at May 10, 2002:
Common Stock $.001 par value 46,608,014 shares
INDEVUS PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002
and September 30, 2001 ................................................. 3
Consolidated Statements of Operations for the Three and Six Months
ended March 31, 2002 and 2001 .......................................... 4
Consolidated Statements of Cash Flows for the Six Months
ended March 31, 2002 and 2001 .......................................... 5
Notes to Unaudited Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders ............ 15
Item 6. Exhibits and Reports on Form 8-K ............................... 16
SIGNATURES ............................................................... 17
2
Item 1. Financial Statements
INDEVUS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands except share data)
March 31, September 30,
2002 2001
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,385 $ 24,923
Marketable securities 13,375 4,479
Accounts receivable 175 331
Prepaids and other current assets 605 397
--------- ---------
Total current assets 40,540 30,130
Marketable securities 10,258 2,769
Equity securities 376 693
Property and equipment, net 25 67
Insurance claim receivable 1,258 1,258
--------- ---------
Total assets $ 52,457 $ 34,917
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 122 $ 53
Accrued expenses 4,538 6,107
--------- ---------
Total current liabilities 4,660 6,160
Minority interest 98 97
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value, 5,000,000 shares authorized;
Series B, 239,425 shares issued and outstanding
(Liquidation preference at March 31, 2002 $3,041) 3,000 3,000
Series C, 5,000 shares issued and outstanding
(liquidation preference at March 31, 2002 $504) 500 500
Common stock; $.001 par value, 80,000,000 shares authorized;
46,608,014 and 43,283,016 shares issued and outstanding at
March 31, 2002 and September 30, 2001, respectively 47 43
Additional paid-in capital 302,584 276,399
Accumulated deficit (258,047) (251,293)
Accumulated other comprehensive income (loss) (385) 11
--------- ---------
Total stockholders' equity 47,699 28,660
--------- ---------
Total liabilities and stockholders' equity $ 52,457 $ 34,917
========= =========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
INDEVUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 2002 and 2001
(Unaudited)
(Amounts in thousands except per share data)
Three months ended March 31, Six months ended March 31,
---------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Royalty revenue $ 14 $ 285 $ 3,213 $ 645
Contract and license fee revenue 72 -- 414 --
---------- ---------- ---------- ----------
Total revenues 86 285 3,627 645
Costs and expenses:
Cost of revenues 85 58 923 130
Research and development 2,501 1,157 5,746 2,198
General and administrative 2,605 2,087 4,183 3,698
Product withdrawal -- (618) -- (618)
---------- ---------- ---------- ----------
Total costs and expenses 5,191 2,684 10,852 5,408
---------- ---------- ---------- ----------
Loss from operations (5,105) (2,399) (7,225) (4,763)
Investment income, net 298 566 526 1,073
Loss on equity securities -- (43) -- (43)
Minority interest (1) (9) (55) (9)
---------- ---------- ---------- ----------
Loss before cumulative effect of change in accounting principle (4,808) (1,885) (6,754) (3,742)
Cumulative effect of change in accounting principle -- -- -- (10,000)
---------- ---------- ---------- ----------
Net loss $ (4,808) $ (1,885) $ (6,754) $ (13,742)
========== ========== ========== ==========
Loss per common share-basic and diluted:
Loss before cumulative effect of change in accounting principle $ (0.10) $ (0.04) $ (0.15) $ (0.09)
Cumulative effect of change in accounting principle -- -- -- (0.23)
---------- ---------- ---------- ----------
Net loss $ (0.10) $ (0.04) $ (0.15) $ (0.32)
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic and diluted 46,508 42,781 45,068 42,781
========== ========== ========== ==========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
INDEVUS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2002 and 2001
(Unaudited)
(Amounts in thousands)
Six months ended March 31,
--------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $ (6,754) $ (13,742)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Cumulative effect of change in accounting principle -- 10,000
Depreciation and amortization 46 54
Minority interest in net income of consolidated subsidiary 55 9
Loss on equity securities -- 43
Noncash compensation 2,139 583
Changes in assets and liabilities:
Accounts receivables 156 --
Insurance claim receivable -- 5,729
Settlement deposit receivable -- 1,757
Prepaid and other assets (208) 545
Accounts payable 69 47
Accrued expenses and other liabilities (1,586) (783)
--------- ----------
Net cash (used in) provided by operating activities (6,083) 4,242
--------- ----------
Cash flows from investing activities:
Purchases of marketable securities (21,132) (3,982)
Proceeds from maturities and sales of marketable securities 4,668 3,968
Capital expenditures (4) (3)
--------- ----------
Net cash used in investing activities (16,468) (17)
--------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 24,067 19
Distribution to minority interest stockholder (54) --
Principal payments of capital lease obligations -- (2)
--------- ----------
Net cash provided by financing activities 24,013 17
--------- ----------
Net change in cash and cash equivalents 1,462 4,242
Cash and cash equivalents at beginning of period 24,923 24,871
--------- ----------
Cash and cash equivalents at end of period $ 26,385 $ 29,113
========= ==========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
INDEVUS PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
---------------------
The consolidated financial statements included herein have been prepared by
Indevus Pharmaceuticals, Inc. ("Indevus" or the "Company") without audit,
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company. The
unaudited consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K for the fiscal year ended September
30, 2001.
Indevus is a biopharmaceutical company engaged in the development and
commercialization of a diversified portfolio of product candidates, including
multiple compounds in late-stage clinical development.
B. Basic and Diluted Loss Per Common Share
---------------------------------------
During the three month period ended March 31, 2002, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 55,000 shares of Common Stock at prices ranging from $9.88 to $20.13
with expiration dates ranging up to December 16, 2006; and (ii) a warrant to
purchase 500,000 shares of Common Stock with an exercise price of $10.00 and
with an expiration date of July 12, 2002. Additionally, during the three month
period ended March 31, 2002, securities not included in the computation of
diluted earnings per share, because they would have an antidilutive effect due
to the net loss for the period, were as follows: (i) options to purchase
9,659,640 shares of Common Stock at prices ranging from $1.47 to $8.75 with
expiration dates ranging up to December 5, 2011; (ii) warrants to purchase
155,000 shares of Common Stock with exercise prices ranging from $5.00 to $7.88
and with expiration dates ranging up to July 17, 2006; (iii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock; and (iv)
unvested Restricted Stock Awards of 225,000 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.
During the three month period ended March 31, 2001, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 5,907,790 shares of Common Stock at prices ranging from $3.13 to
$20.13 with expiration dates ranging up to March 8, 2011; and (ii) warrants to
purchase 750,000 shares of Common Stock with exercise prices ranging from $5.00
to $10.00 and with expiration dates ranging up to July 17, 2006. Additionally,
during the three month period ended March 31, 2001, securities not included in
the computation of diluted earnings per share, because they would have an
antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 3,781,750 shares of Common Stock at prices ranging from
$1.47 to $2.38 with expiration dates ranging up to August 14, 2010; (ii) Series
B and C preferred stock convertible into 622,222 shares of Common Stock; and
(iii) unvested Restricted Stock Awards of 450,000 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.
During the six month period ended March 31, 2002, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 75,000 shares of Common Stock at prices ranging from $8.75 to $20.13
with expiration dates ranging up to December 16, 2006; and (ii) a warrant to
purchase 500,000 shares of Common Stock with an exercise price of $10.00 and
with an expiration date of July 12, 2002. Additionally, during the six month
period ended March 31, 2002, securities not included in the computation of
diluted earnings per share, because they would have an antidilutive effect due
to the net loss for the period, were as follows: (i) options to
6
purchase 9,587,751 shares of Common Stock at prices ranging from $1.47 to $8.37
with expiration dates ranging up to December 12, 2011; (ii) warrants to purchase
155,000 shares of Common Stock with exercise prices ranging from $5.00 to $7.88
and with expiration dates ranging up to July 17, 2006; (iii) Series B and C
preferred stock convertible into 622,222 shares of Common Stock; and (iv)
unvested Restricted Stock Awards of 225,000 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.
During the six month period ended March 31, 2001, securities not included
in the computation of diluted earnings per share, because their exercise price
exceeded the average market price during the period were as follows: (i) options
to purchase 9,145,790 shares of Common Stock at prices ranging from $2.38 to
$20.13 with expiration dates ranging up to March 8, 2011; and (ii) warrants to
purchase 750,000 shares of Common Stock with exercise prices ranging from $5.00
to $10.00 and with expiration dates ranging up to July 17, 2006. Additionally,
during the six month period ended March 31, 2001, securities not included in the
computation of diluted earnings per share, because they would have an
antidilutive effect due to the net loss for the period, were as follows: (i)
options to purchase 543,750 shares of Common Stock at prices ranging from $1.47
to $2.06 with expiration dates ranging up to August 14, 2010; (ii) Series B and
C preferred stock convertible into 622,222 shares of Common Stock; and (iii)
unvested Restricted Stock Awards of 450,000 shares of Common Stock granted
pursuant to the Company's 1997 Equity Incentive Plan.
Certain of the above securities contain anti-dilution provisions which may
result in a change in the exercise price or number of shares issuable upon
exercise of such securities.
C. Comprehensive Loss
------------------
Comprehensive loss for the three and six month periods ended March 31, 2002
and 2001, respectively, is as follows:
Three Months Ended March 31, Six Months Ended March 31,
----------------------------- ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(4,808,000) $(1,885,000) $(6,754,000) $(13,742,000)
Change in unrealized net
gain or loss on investments (272,000) (67,000) (396,000) (661,000)
----------- ----------- ------------ ------------
Comprehensive loss $(5,080,000) $(1,952,000) $(7,150,000) $(14,403,000)
=========== =========== =========== ============
D. Equity
------
In December 2001, the Company completed a private placement of 3,125,000
shares of its Common Stock which resulted in net proceeds to the Company of
approximately $23,300,000. A Form S-3 registration statement registering the
resale of these shares became effective in March 2002.
E. Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 requires that ratable amortization of goodwill be
replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company, as required, in fiscal year 2003. The Company does
not expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material
effect on the Company's financial condition or results of operations.
7
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and provides a single
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001, and, generally,
its provisions are to be applied prospectively. The Company does not expect SFAS
No. 144 will have a material effect on its financial position or results of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations:
--------------
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 and are subject to numerous risks and
uncertainties. These and other forward-looking statements made by the Company in
reports that we file with the Securities and Exchange Commission, press
releases, and public statements of our officers, corporate spokespersons, or our
representatives are based on a number of assumptions and relate to, without
limitation: the Company's ability to successfully develop, obtain regulatory
approval for and commercialize any products; the Company's ability to enter into
corporate collaborations or obtain sufficient additional capital to fund
operations; and the Redux(TM)-related litigation. The words "believe," "expect,"
"anticipate," "intend," "plan," "estimate" or other expressions which are
predictions of or indicate future events and trends and do not relate to
historical matters identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements as they involve
risks and uncertainties, and such forward-looking statements may turn out to be
wrong. Actual results could differ materially from those currently anticipated
due to a number of factors, including those set forth under "Risk Factors" and
elsewhere in, or incorporated by reference into, the Company's Form 10-K for its
fiscal year ended September 30, 2001. These factors include, but are not limited
to: uncertainties relating to clinical trials, regulatory approval and
commercialization of our products; the early stage of products under
development; need for additional funds and corporate partners; history of
operating losses and expectation of future losses; product liability and
insurance uncertainties; risks relating to the Redux-related litigation;
dependence on third parties for manufacturing and marketing; competition; risks
associated with contractual arrangements; limited patent and proprietary rights;
and other risks. The forward-looking statements represent our judgement and
expectations as of the date of this Form 10-Q. We assume no obligation to update
any such forward-looking statements.
The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto appearing
elsewhere in this report and audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2001. Unless the context indicates otherwise, "Indevus" or
the "Company" refer to Indevus Pharmaceuticals, Inc.
General
Description of the Company
Indevus is a biopharmaceutical company engaged in the development and
commercialization of a diversified portfolio of product candidates, including
multiple compounds in late stage clinical development. The Company is currently
developing or has certain rights to six compounds: pagoclone for panic and
generalized anxiety disorders, trospium for the treatment of overactive bladder,
IP 501 for the treatment of cirrhosis of the liver, citicoline for the treatment
of ischemic stroke, PRO 2000 for the prevention of infection by the human
immunodeficiency virus and other sexually transmitted pathogens, and dersalazine
for the treatment of inflammatory bowel disease.
Major Products
Trospium is a muscarinic receptor antagonist in development as a treatment
for overactive bladder. The Company is currently conducting a Phase III,
double-blind, placebo-controlled study in approximately 500 patients,
8
comparing the number of micturitions and incontinence episodes among
trospium-treated patients versus placebo-treated patients during a twelve week
treatment period. The trial is expected to be completed in the fall of 2002. If
the trial is successful, the Company currently plans to file a U.S. New Drug
Application ("NDA") by the end of 2002.
Pagoclone is a novel GABA (gamma amino butyric acid) receptor agonist in
development for the treatment of anxiety disorders. In December 2001, Pfizer
Inc. ("Pfizer"), the Company's licensee for pagoclone, announced that in a Phase
II clinical trial, patients treated with pagoclone experienced a statistically
significant improvement in symptoms of generalized anxiety disorder ("GAD")
compared to patients treated with placebo. In addition, pagoclone was well
tolerated, with no difference from placebo in sedation and no evidence of
withdrawal effects. As part of its comprehensive clinical development program
for pagoclone, Pfizer is conducting multiple clinical pharmacology studies and
is nearing the completion of a series of Phase II trials in GAD and a Phase III
trial in panic disorder. Under the Company's agreement with Pfizer (the "Pfizer
Agreement"), by June 23, 2002, Pfizer will be obligated to pay the Company a
$10,000,000 milestone payment in order to retain its rights under the Pfizer
Agreement.
PRO 2000 is a topical microbicide in development for the prevention of the
sexual transmission of HIV and other sexually-transmitted diseases. Multiple
clinical trials with PRO 2000 in HIV prevention are expected to begin in 2002,
including a Phase II trial sponsored by the European Commission and a Phase
II/III trial to be conducted by the National Institutes of Health in
approximately 10,000 women in Africa and India. In February 2002, an
international research collaboration received a grant of approximately $22.7
million from the U.K.'s Department for International Development to test the
safety and efficacy of vaginal microbicides, including PRO 2000. This grant will
support a broad, five-year program that will include a multi-national, Phase III
clinical trial of candidate microbicides.
In September 2001, the Company acquired worldwide rights to dersalazine, an
anti-inflammatory compound in clinical development to treat inflammatory bowel
disease, which includes ulcerative colitis and Crohn's disease. The Company
commenced a multiple-dose Phase I clinical study with dersalazine in March 2002
and expects the trial to be completed in the third quarter of 2002. Pending a
positive outcome of this trial, the Company expects to begin testing dersalazine
in patients with ulcerative colitis prior to the end of 2002.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States of America. The preparation of these financial statements requires
us to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expense during the reported periods. These items are constantly
monitored and analyzed by management for changes in facts and circumstances, and
material changes in these estimates could occur in the future. Changes in
estimates are recorded in the period in which they become known. We base our
estimates on historical experience and various other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ from our
estimates if past experience or other assumptions do not turn out to be
substantially accurate.
In December 2001, the SEC requested that all registrants discuss their
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. A critical accounting policy is a
policy that is both important to the portrayal of the Company's financial
conditions and results, and requires management's most difficult, subjective or
complex judgements and estimates. While our significant accounting policies are
more fully described in the notes to our audited consolidated financial
statements included in our Form 10-K for the fiscal year ended September 30,
2001, we consider our revenue recognition policy critical and therefore we state
it below.
Revenue Recognition: Contract and license fee revenue is primarily
generated through collaborative license and development agreements with
strategic partners for the development and commercialization of the Company's
product candidates. The terms of the agreements typically include non-refundable
license fees, funding of research and development, payments based upon
achievement of certain milestones and royalties on net product sales. Non-
9
refundable license fees are recognized as contract and license fee revenue
when the Company has a contractual right to receive such payment, provided a
contractual arrangement exists, the contract price is fixed or determinable, the
collection of the resulting receivable is reasonably assured and the Company has
no further performance obligations under the license agreement.
Revenues from milestone payments related to arrangements under which the
Company has no continuing performance obligations are recognized upon
achievement of the related milestone. Revenues from milestone payments related
to arrangements under which the Company has continuing performance obligations
are recognized as revenue upon achievement of the milestone only if all of the
following conditions are met: the milestone payments are non-refundable;
achievement of the milestone was not reasonably assured at the inception of the
arrangement; substantive effort is involved in achieving the milestone; and the
amount of the milestone is reasonable in relation to the effort expended or the
risk associated with achievement of the milestone. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue over
the term of the arrangement as the Company completes its performance
obligations.
Royalty revenue consists of payments received from licensees for a portion
of sales proceeds from products that utilize the Company's licensed technologies
and is recognized when the amount of and basis for such royalty payments are
reported to the Company in accurate and appropriate form and in accordance with
the related license agreement.
Cash received in advance of revenue recognition is recorded as deferred
revenue.
Results of Operations
Total revenues decreased to $86,000 in the three month period ended March
31, 2002 from $285,000 in the three month period ended March 31, 2001 and
increased to $3,627,000 in the six month period ended March 31, 2002 from
$645,000 in the six month period ended March 31, 2001. Royalty revenue was
derived from sales of Sarafem by Eli Lilly and Company ("Lilly") and contract
and license fee revenue resulted from a research grant related to certain PRO
2000 development costs. The substantial increase in Sarafem royalties in the six
month period ended March 31, 2002 resulted from approximately $3,199,000 of
royalties recognized in the first quarter of fiscal 2002 from higher sales of
Sarafem. Royalty revenue decreased to $14,000 in the second quarter of fiscal
2002 as a result of the achievement by Lilly of the maximum amount of royalties
in the contractual royalty year. Lilly has notified the Company that the Company
should not expect to receive future Sarafem royalties. The Company and Lilly
differ in the interpretation of certain provisions of the Sarafem license
agreement, including the contractual duration of the Sarafem royalties, and are
currently discussing a resolution of these differences. Additionally, the
Company has recognized the full amount of revenue available from the PRO 2000
research grant.
Cost of revenues for each period includes amounts due to Massachusetts
Institute of Technology for their portion of the Sarafem royalty revenue.
Additionally, costs of revenues for the three and six month periods ended March
31, 2002 include the development costs related to the PRO 2000 research grant.
Research and development expense increased $1,344,000, or 116%, to
$2,501,000 in the three month period ended March 31, 2002 from $1,157,000 in the
three month period ended March 31, 2001 and increased $3,548,000, or 161%, to
$5,746,000 in the six month period ended March 31, 2002 from $2,198,000 in the
six month period ended March 31, 2001. These increases are primarily due to
expenses incurred by the Company for its Phase III clinical trial for trospium
which commenced in September 2001. Additionally, noncash expense related to a
stock option grant and modifications of stock option grants was offset by
reduced development costs related to PRO 2000 as certain stability programs
ended. Total research and development costs for the three month period ended
March 31, 2002 substantially relate to the Company's major compounds currently
being developed as follows: trospium $2,114,000, PRO 2000 $191,000, and
dersalazine $176,000.
General and administrative expense increased $518,000, or 25%, to
$2,605,000 in the three month period ended March 31, 2002 from $2,087,000 in the
three month period ended March 31, 2001 and increased $485,000, or 13%, to
$4,183,000 in the six month period ended March 31, 2002 from $3,698,000 in the
six month period ended March 31, 2001. These increases are primarily due to
noncash expense related to modifications of stock option grants partially offset
by the absence of legal and consulting fees relating to the Company's former
suit against American Home Products Corporation ("AHP", now Wyeth).
10
The product withdrawal credit of $618,000 reflected in the three and six
month periods ended March 31, 2001 relates to the insurance reimbursement of
certain Redux-related costs included in an insurance claim payment received by
the Company in January 2001.
Investment income decreased $268,000, or 47%, to $298,000 in the three
month period ended March 31, 2002 from $566,000 in the three month period ended
March 31, 2001 and decreased $547,000, or 51%, to $526,000 in the six month
period ended March 31, 2002 from $1,073,000 in the six month period ended March
31, 2001. Despite higher average invested cash balances, these decreases
resulted from substantially reduced market interest rates for the fiscal 2002
periods compared to the fiscal 2001 periods.
The charge for the cumulative effect of the change in accounting principle
of $10,000,000 in the six month period ended March 31, 2001 is related to the
Company's adoption in fiscal 2001 of the SEC's Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements."
For the three month period ended March 31, 2002, the Company had a net loss
of $(4,808,000), or $(0.10) per share, diluted, compared to net loss of
$(1,885,000), or $(0.04) per share, diluted, for the three month period ended
March 31, 2001. For the six month period ended March 31, 2002, the Company had a
net loss of $(6,754,000), or $(0.15) per share, diluted, compared to a net loss
of $(13,742,000), or $(0.32) per share, diluted, for the six month period ended
March 31, 2001. The Company expects to report losses for its consolidated
operations for fiscal 2002.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
At March 31, 2002, the Company had consolidated cash, cash equivalents and
marketable securities of $50,018,000 compared to $32,171,000 at September 30,
2001. This increase of $17,847,000 is primarily due to receipt of approximately
$23,300,000 of net proceeds from the Company's December 2001 private placement
of 3,125,000 shares of Common Stock, offset primarily by $6,083,000 of cash used
in operating activities.
The Company believes it has sufficient cash for currently planned
expenditures for at least the next twelve months. Based on certain assumptions
relating to operations and other factors, the Company may require additional
funds after such time. The Company does not currently have sufficient funds to
fully develop and commercialize any of its current products and product
candidates and will require additional funds or corporate collaborations for the
development and commercialization of its compounds in development, as well as
any new businesses, products or technologies acquired or developed in the
future. The Company has no commitments to obtain such funds. There can be no
assurance that the Company will be able to obtain additional financing to
satisfy future cash requirements or that any financing will be available on
terms favorable or acceptable, or at all.
Product Development
The Company expects to continue to expend substantial additional amounts
for the development of its products. In particular, the Company expects to
expend a substantial amount during the next twelve months to fund development,
including its on-going Phase III trial, regulatory and pre-marketing activities
for trospium. There can be no assurance that results of any on-going or future
pre-clinical or clinical trials will be successful, that additional trials will
not be required, that any drug or product under development will receive FDA
approval in a timely manner or at all, or that such drug or product could be
successfully manufactured in accordance with current Good Manufacturing
Practices or successfully marketed in a timely manner, or at all, or that the
Company will have sufficient funds to develop or commercialize any of its
products.
Total research and development costs incurred by the Company through March
31, 2002 on the major compounds currently being developed, except pagoclone,
including allocation of corporate general and administrative expenses, are
approximately as follows: trospium $17,300,000, PRO 2000 $5,700,000, and
dersalazine $900,000. Pfizer has full contractual responsibility for all
pagoclone development costs. Estimating costs and time to complete development
of a compound is difficult due to the uncertainties of the development process
and the requirements of the U.S. Food and Drug Administration which could
necessitate additional and unexpected clinical
11
trials or other development, testing and analysis. Results of any testing could
result in a decision to alter or terminate development of a compound, in which
case estimated future costs could change substantially. Certain compounds could
benefit from subsidies, grants or government- or agency-sponsored studies that
could reduce the Company's development costs. In the event the Company were to
enter into a licensing or other collaborative agreement with a corporate partner
involving sharing, funding or assumption by such corporate partner of
development costs, the estimated development costs incurred by the Company could
be substantially less than the estimates below. Additionally, research and
development costs are extremely difficult to estimate for early-stage compounds
due to the fact that there is generally less comprehensive data available for
such compounds to determine the development activities that would be required
prior to the filing of an NDA. Given these uncertainties and other risks,
variables and considerations related to each compound and regulatory
uncertainties in general, the Company estimates research and development costs,
excluding allocation of corporate general and administrative expenses, through
the preparation of an NDA for its major compounds currently being developed as
follows: approximately $9,000,000 for trospium, approximately $15,000,000 for
PRO 2000 and approximately $38,000,000 for dersalazine. The Company cannot
reasonably estimate date of completion for any compound that is not at least in
Phase III clinical development due to the uncertainty of the number of required
trials and size of such trials and the duration of development. The Company
estimates that it will file an NDA for trospium by the end of 2002. Actual costs
and time to complete may differ significantly from the estimates.
Analysis of Cash Flows
Cash used in operating activities during fiscal 2002 of $6,083,000
consisted primarily of the net loss of $(6,754,000), noncash compensation
related to stock option grants and modifications of stock options and a net
reduction of accrued expenses and other liabilities.
Cash used in investing activities in fiscal 2002 of $16,468,000 consisted
primarily of net outflows from purchases of marketable securities.
Cash provided by financing activities in fiscal 2002 of $24,013,000
consisted primarily of net proceeds from the Company's December 2001 private
placement of 3,125,000 shares of its Common Stock.
Insurance Claim Receivable
As of March 31, 2002, the Company had an outstanding insurance claim of
approximately $3,660,000, which the Company paid through March 31, 2002 to the
group of law firms defending the Company in the Redux-related product liability
litigation, for services rendered by such law firms through May 30, 2001. The
full amount of the Company's current outstanding insurance claim is made
pursuant to the Company's product liability policy issued to the Company by
Reliance Insurance Company ("Reliance").
In October 2001, the Commonwealth Court of Pennsylvania granted an Order of
Liquidation to the Insurance Commissioner of Pennsylvania to begin liquidation
proceedings against Reliance. Based upon discussions with the Company's
attorneys and other consultants regarding the amount and timing of potential
collection of its claim against Reliance, the Company reduced the balance to an
estimated net realizable value of $1,258,000 reflecting the Company's best
estimate given the available facts and circumstances. The amount the Company
collects could differ from the $1,258,000 reflected as a noncurrent insurance
claim receivable at March 31, 2002. There can be no assurance that the Company
will collect any of the $3,660,000 claim. If the Company incurs additional
product liability defense and other costs within the remaining limits of the
$5,000,000 Reliance product liability policy, the Company will have to pay such
costs without expectation of reimbursement and will incur charges to operations
for all or a portion of such payments.
12
Commitments and Contingencies
Below are the Company's future minimum payments under non-cancellable lease
arrangements as of September 30, 2001:
Operating
Fiscal Year Leases
----------- ----------
2002 .................................................. $ 470,000
2003 .................................................. 534,000
2004 .................................................. 536,000
2005 .................................................. 553,000
2006 .................................................. 568,000
Thereafter ............................................ 313,000
----------
Total lease payments ............................. $2,974,000
==========
Other
Recent Accounting Pronouncements: In June 2001, the FASB issued SFAS No.
141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company as required, in fiscal year 2003. The Company
does not expect the adoption of SFAS No. 141 and SFAS No. 142 to have a
material effect on the Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", and provides a single
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of SFAS No. 144 will
be effective for fiscal years beginning after December 15, 2001, and, generally,
its provisions are to be applied prospectively. The Company does not expect SFAS
No. 144 will have a material effect on its financial position or results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
Indevus owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
Indevus' capital until it is required to fund operations, including Indevus'
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Indevus does not own derivative
financial instruments in its investment portfolio.
Interest Rate Risk
Indevus invests its cash in a variety of financial instruments, principally
securities issued by the U.S. government and its agencies, investment grade
corporate and money market instruments. These investments are denominated in
U.S. dollars. These bonds are subject to interest rate risk, and could decline
in value if interest rates fluctuate. Indevus' investment portfolio includes
only marketable securities with active secondary or resale markets to help
ensure portfolio liquidity. Also, Indevus has implemented guidelines limiting
the duration of its investments. Due to the conservative nature of these
instruments, Indevus does not believe that it has a material exposure to
interest rate risk.
13
PART II. Other Information
Item 1. Legal Proceedings
--------------------------
Product Liability Litigation: Subsequent to the market withdrawal of Redux
in September 1997, the Company has been named, together with other
pharmaceutical companies, as a defendant in approximately 3,200 legal actions,
many of which purport to be class actions, in federal and state courts relating
to the use of Redux. The actions generally have been brought by individuals in
their own right or on behalf of putative classes of persons who claim to have
suffered injury or who claim that they may suffer injury in the future due to
use of one or more weight loss drugs including Pondimin (fenfluramine),
phentermine and Redux. Plaintiffs' allegations of liability are based on various
theories of recovery, including, but not limited to, product liability, strict
liability, negligence, various breaches of warranty, conspiracy, fraud,
misrepresentation and deceit. These lawsuits typically allege that the short
or long-term use of Pondimin and/or Redux, independently or in combination
(including the combination of Pondimin and phentermine popularly known as
"fen-phen"), causes, among other things, primary pulmonary hypertension,
valvular heart disease and/or neurological dysfunction. In addition, some
lawsuits allege emotional distress caused by the purported increased risk of
injury in the future. Plaintiffs typically seek relief in the form of monetary
damages (including economic losses, medical care and monitoring expenses, loss
of earnings and earnings capacity, other compensatory damages and punitive
damages), generally in unspecified amounts, on behalf of the individual or the
class. In addition, some actions seeking class certification ask for certain
types of purportedly equitable relief, including, but not limited to,
declaratory judgments and the establishment of a research program or medical
surveillance fund. On December 10, 1997, the federal Judicial Panel on
Multidistrict Litigation issued an Order allowing for the transfer or potential
transfer of the federal actions to the Eastern District of Pennsylvania for
coordinated or consolidated pretrial proceedings. To date, there have been no
judgments against the Company, nor has the Company paid any amounts in
settlement of any of these claims.
The Company entered into the AHP Indemnity and Release Agreement on May 30,
2001 pursuant to which AHP agreed to indemnify the Company against certain
classes of product liability cases filed against Indevus related to Redux. The
Company's indemnification covers existing plaintiffs who have already opted out
of AHP's national class action settlement of diet drug claims and claimants
alleging primary pulmonary hypertension. In addition, AHP has agreed to fund all
future legal costs related to the Company's defense of Redux-related product
liability cases. The agreement also provides for AHP to fund additional
insurance coverage to supplement the Company's existing product liability
insurance. The Company believes this total insurance coverage is sufficient to
address its potential remaining Redux product liability exposure. However, there
can be no assurance that uninsured or insufficiently insured Redux-related
claims or Redux-related claims for which the Company is not otherwise
indemnified or covered under the AHP Indemnity and Release Agreement will not
have a material adverse effect on the Company's future business, results of
operations or financial condition or that the potential of any such claims would
not adversely affect the Company's ability to obtain sufficient financing to
fund operations. Up to the date of the AHP Indemnity and Release Agreement, the
Company's defense costs were paid by, or subject to reimbursement to the Company
from, the Company's product liability insurers. To date, there have been no
Redux-related product liability settlements or judgments paid by the Company or
its insurers. In exchange for the indemnification, defense costs, and insurance
coverage provided to Indevus by AHP, the Company agreed to dismiss its suit
against AHP filed in January 2000, its appeal from the order approving AHP's
national class action settlement of diet drug claims, and its cross-claims
against AHP related to Redux product liability legal actions.
Insurance Litigation: On August 7, 2001, Columbia Casualty Company, one of
the Company's insurers for the period May 1997 through May 1998, filed an action
in the United States District Court for the District of Columbia against the
Company. The lawsuit has been transferred to the U.S. District Court for the
District of Massachusetts. The lawsuit is based upon a claim for breach of
contract and declaratory judgment, seeking damages against the Company in excess
of $20,000,000, the amount that the plaintiff has paid to the Company under its
insurance policy. The plaintiff alleges that under the policy it was subrogated
to any claim for indemnification that Indevus may have had against AHP related
to Redux and that such claim was compromised without its consent when the
Company entered into the AHP Indemnity and Release Agreement. The Company is
vigorously defending this litigation.
14
General: Pursuant to agreements between the parties and related to the
diet-drug litigation, under certain circumstances, the Company may be required
to indemnify Les Laboratoires Servier, Boehringer Ingelheim Pharmaceuticals,
Inc. and other parties.
Although the Company maintains certain product liability and director and
officer liability insurance and intends to defend these and similar actions
vigorously, the Company has been required and may continue to be required to
devote significant management time and resources to these legal actions. In the
event of successful uninsured or insufficiently insured claims, or in the event
a successful indemnification claim were made against the Company and its
officers and directors, the Company's business, financial condition and results
of operations could be materially adversely affected. The uncertainties and
costs associated with these legal actions have had, and may continue to have, an
adverse effect on the market price of the Company's Common Stock and on the
Company's ability to obtain corporate collaborations or additional financing to
satisfy cash requirements, to retain and attract qualified personnel, to develop
and commercialize products on a timely and adequate basis, to acquire rights to
additional products, or to obtain product liability insurance for other products
at costs acceptable to the Company, or at all, any or all of which may
materially adversely affect the Company's business, financial condition and
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The Company's annual meeting of stockholders was held on April 2, 2002. At
the meeting (i) all seven director nominees were elected; (ii) the amendment of
the Company's Restated Certificate of Incorporation, as amended, to change the
name of the Company from "Interneuron Pharmaceuticals, Inc." to "Indevus
Pharmaceuticals, Inc." was approved; (iii) the amendment of the Company's
Restated Certificate of Incorporation, as amended, to delete certain restrictive
covenants relating to the Company's Series B Preferred Stock was approved; (iv)
the amendment to the Company's 2000 Stock Option Plan increasing the number of
shares reserved for issuance thereunder from 2,500,000 shares to 3,500,000
shares was approved; and (v) the appointment of PricewaterhouseCoopers LLP as
the Company's independent auditors was ratified.
(i) The following Directors were elected for a one-year term by the votes
indicated:
Glenn L. Cooper, M.D., 38,121,495 for, 2,838,850 against; Harry J. Gray,
35,696,220 for, 5,264,125 against; Alexander M. Haig, Jr., 40,595,286 for,
365,059 against; Malcolm Morville, Ph.D., 40,820,382 for, 139,963 against;
Lindsay A. Rosenwald, M.D., 40,635,177 for, 325,168 against; Lee J. Schroeder,
35,697,957 for, 5,262,388 against; and David B. Sharrock, 40,443,824 for,
516,521 against.
(ii) The amendment of the Company's Restated Certificate of Incorporation,
as amended, to change the name of the Company from "Interneuron Pharmaceuticals,
Inc." to "Indevus Pharmaceuticals, Inc." was approved by a vote of 41,211,387
for, 321,726 against, and 49,453 abstaining.
(iii) The amendment of the Company's Restated Certificate of Incorporation,
as amended, to delete certain restrictive covenants relating to the Company's
Series B Preferred Stock was approved by a vote of 26,756,192 for, 311,600
against, and 153,318 abstaining.
(iv) The amendment to the Company's 2000 Stock Option Plan increasing the
number of shares reserved for issuance thereunder from 2,500,000 shares to
3,500,000 shares was approved by a vote of 31,858,208 for, 9,617,145 against,
and 107,213 abstaining.
(v) The appointment of PricewaterhouseCoopers LLP was ratified by a vote
of 41,263,908 for, 277,584 against, and 41,075 abstaining.
15
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
On January 3, 2002, the Company filed a report on Form 8-K reporting it
had closed a private placement of 3,125,000 shares of the Company's
Common Stock to a group of institutional investors and their affiliates
at a price of $8.00 per share which resulted in $25,000,000 of gross
proceeds to the Company.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDEVUS PHARMACEUTICALS, INC.
Date: May 14, 2002 By: /s/ Glenn L. Cooper, M.D.
---------------------------------------------
Glenn L. Cooper, M.D., President, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2002 By: /s/ Michael W. Rogers
---------------------------------------------
Michael W. Rogers, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: May 14, 2002 By: /s/ Dale Ritter
---------------------------------------------
Dale Ritter, Senior Vice President, Finance
(Principal Accounting Officer)
17